An extremist, not a fanatic

June 04, 2008

Greens vs "conventional economics"

One thing I find irritating is the tendency of some leftists to attack mainstream economics without understanding it. I fear Tony Juniper is doing just this, in accusing “conventional economists” of “missing the point” on the environment.He says:

The impacts of releasing carbon dioxide through clear-felling an ancient rainforest are externalities not reflected in the price of beef, soya or timber. Because the externalities are excluded from how we calculate the overall impact of deforestation, it seems from an economic point of view to often be a positive process.

No. It may be a positive process from the point of view of accountants, or profit maximizers. But it’s not positive from the economic point of view. Economists have known for decades that externalities cause social costs to deviate from private costs. And they’ve known how to solve this - the most obvious way being to tax negative externalities, so that the private cost of doing them equates the social cost. Greg Mankiw - as mainstream an economist as you’ll find - has set up the Pigou Club, to advocate just this. The only question - which I suspect is the real point of dispute between Tim and Mr Juniper - is the technical and ethical one of what precisely the tax should be.

Even oil spills count positively in conventional economic calculations - for example, because of the money spent on buying detergents and hiring ships and people for clean-up.

This is a howler. If there weren’t an oil spill, the money spent on detergents would be spent on something else. So oil spills aren’t a positive at all. Conventional economics has a term for this - it’s Bastiat’s broken window fallacy.

The fact that natural capital is being liquidated to achieve "progress", or that some of the "growth" we are enjoying now will lead to very severe costs later on, is nowhere to be seen in the calculations of economic progress published by governments and international agencies.

He’s right - resource depletion doesn’t feature in conventional GDP measures. But no serious economist thinks maximizing GDP is a worthwhile goal. If we did, we’d work 24 hours a day.

If anyone is missing the main point about the environment it has to be conventional economists. Nowhere in our national accounts do they count the fabric of our planet for anything.

Not in the national accounts, they don’t. But national accounts aren’t the only - or even main - object of economists’ inquiry. What also matters are individual transactions. And here, Mr Juniper could have an ally in mainstream economics. His claim that the value of ecosystem services to mankind is being overlooked is a conventional claim about the tragedy of the commons. Because the ecosystem is, in effect, commonly owned, everyone has an incentive to predate upon it and degrade it. And again, conventional economics has a solution - to give someone formal ownership of ecosystems, as has happened with some success in African wildlife. Deforesters and polluters would then have to pay to deplete ecosystems. So they’d only do so if the benefits to mankind exceeded the costs.Again, the question is not: environment versus economics? It’s the technical ones of how to create effective property rights, and how to price access to them.Now, unlike many of Mr Juniper’s critics, I say all this in sorrow, not anger. Conventional economics - which is distinct from plundering capitalism - can be the ally of environmentalists, not its opponent.

Comments

Simple, Kit. Profit maximizing can dictate that firms pollute or violate others' property rights. Mainstream economics doesn't condone this, unless the social benefits exceed the social costs - which from the point of view of the firm will be a happy accident.

Of course, the fact that spending on cleaning up an oil spill is reflected in GDP isn't a bug, it's a feature. In a sense, it accounts for the value we place on an oil-free coastline - we're willing to spend X million pounds on cleaning up and restoring it, ergo we value its non-oilsplit condition at X million pounds.

"The only question - which I suspect is the real point of dispute between Tim and Mr Juniper - is the technical and ethical one of what precisely the tax should be."

Thats a pretty big question though isn't it? Particularly given that industry will deny any externalties exist, its consumers will protest against any tax (fuel protests anyone?) and governments will tend to choose the level of tax that maximises revanue within politically acceptable limits rather than the "correct" level (and how exactly do you calculate the "correct" value of nature lost to pollution - it surely involves a normative calculation somewhere). There is also the side issue of whether it is really sensible to give government a financial stake in the consumption of harmful activities, and whether government will use the revanues generated to deal with the externalties.

"Because the ecosystem is, in effect, commonly owned, everyone has an incentive to predate upon it and degrade it"

No that is not the problem. It is not that it is commonly owned that causes the waste, it is that there is no charge for using it that is the problem. If it is owned by someone with a very high discount rate it degrades just the same.

Chris - as a socialist - I'm shocked you fell into this trap with "tragedy of the commons". Ownership is a two-edged sword. It also gives unearned privilege of potentially the worst sort (if the privilege is underprices).

Chris - I also think you are being disingenious here. A lot of economists do in practice talk as though an increase in GNP is unambiguously a good thing. I always like to turn the old saw "if I can't measure it, I can't manage it" on its head. We tend to only manage what we measure. We should spend more time looking for measures of what we really care about.

Alex
"Of course, the fact that spending on cleaning up an oil spill is reflected in GDP isn't a bug, it's a feature. In a sense, it accounts for the value we place on an oil-free coastline - we're willing to spend X million pounds on cleaning up and restoring it, ergo we value its non-oilsplit condition at X million pounds."

Umm no that won't sit. Spending x million pounds to clean up isn't better than not spilling the oil in the first place. We should be adding x million every year when we don't spill oil.

Tim has a habit of saying things like "The basic principle of the taxation though, a simple Pigou tax upon environmental externalities, is entirely sound (we can still argue at what rate it should be imposed, but that’s very much another matter).... After we’ve imposed a Pigou tax (at that arguable rate) then we need to do nothing else at all about aviation. We don’t need to limit flights, we can build as many airports and runways as we like. As long as people are paying the full and total cost of their activities then we can safely leave markets to do their stuff and we’ll end up with the socially optimal outcome."

The problem is that there is simply no way, even in theory, to calculate this "simple" tax which covers the "full and total cost" of environmental pollution. This is where economists descend into utter fantasy. Even without the dozens of unknowns which we have to fill in with crude guess-work, the ethical dimension is entirely subjective: what's an Orangutan worth? And of course the fundamental question at the core of the Pigou tax: how much we should discount the future, is again *purely* subjective. Beyond all these, if we get start setting aside serious quantities of land for forests, or increase the level of the topsoil, or any number of other possibilities, then we can emit more CO2. So if you're going to do things properly, you'll have to encode the entire planet's ecosystem into the tax system. So much for "simple".

The point I'm making is that, subject to personal prejudice, you'll be able to arrive at a tax set at anywhere between 0 and 100%. In which case you may as well just go ahead and do it, instead of pretending that you've cleverly calculated some sort of social/economic/ecological optimum: you haven't.

One thing about this blog - I've thought this before - I sometimes wonder whether Chris isn't taking the micky out of the readers here sometimes. I get the feeling he doesn't always believe what he writes.

I enjoyed your post, but am not a regular reader. However in critiquing Tony Juniper, which highlights a deal of good work by mainstream economists, you miss what I think is the main point (which he seems to be extrapolating from Waring), that the overriding tendency in conventional mainstream economics is to defend a system which systematically degrades the environment, some say to the point of exhaustion. It is not that there are not economists who are working, or have worked, against this trend, but rather that they are overruled, nullified, etc. by the vast majority of practising economists -- from the talking heads on CNN, to the Economist, and into the classroom.

I believe Tony is correct in highlighting the fact that GDP as the main measure (who are we kidding, it is) of the national and international economies and growth (another concept that can can do serious damage to the environment when used improperly by politicians and economists alike). Using the national accounts system and GDP as the main indicators, and only factoring in aspects of our surroundings and society that can be quantified leads (generally speaking) to the dominant tendency (since you seem familiar with Marx I feel comfortable not having to fit this argument into a direct causal relationship) to promote environmental degradation.

That not all mainstream economists are blind to this is obvious. But the general consensus, taken on the whole, and aggravated perhaps by a market for economists who support rather than critique capitalist economics, leads to an academic discipline that does not properly take into consideration environmental (among other)factors.

"And again, conventional economics has a solution - to give someone formal ownership of ecosystems (pdf), as has happened with some success in African wildlife."

Er, your first link is broken and your second one is to a discussion of how assigning property rights is difficult and frequently doesn't work. Privatising an entire ecosystem is wildly impractical, so I suppose that leaves us with taxes, but some economists pretend that these issues of implementation don't exist, which then undermines the case for taxes on externalities.

Good point, but I should further point out that if we are talking about entire eco-systems the problem of ignorance and enforcement both become significant. That is why I think it has become apparent that the best solution to overfishing is ocean reserves rather than fishing rights.

Good point Jim,
I think I could further add that in the case of whole ecosystems both ignorance and enforcement problems can be severe. That is why I think for instance that in the case of overfishing the best solution is ocean reserves rather than fishing rights.

The ecosystem is not a zero sum game that can be part of a economic model. That is the main problem of this discussion. The ecosystem is to diverse and interconnected to fit neatly into any current economic theory.

That fact has not stopped economist from trying to shoe horn their ideas into nature.

What is needed is a new economic theory based on the ecosystem, then and only then can modeling be done with any hope of success.

If you have a grad student looking for a thesis topic I will be more than happy to work with them.

Juniper is technically wrong, but right in spirit. Most mainstream economists do, indeed, tip their hats to all the things you say, Chris. But they're pretty good at compartmentalizing them from their general picture of the world, especially when it comes to policy prescriptions.

For example, most mainstream economists would admit that much of GDP consists of the cost of broken windows. Yet it's hard to find a pro-globalization mainstream economist without seeing some appeal to rising GDPs as evidence of the beneficial effects of "trade." It's quite possible for a Third World country's GDP to mushroom, and yet its real standard of living fall catastrophically.

E.g. Kenya, where the best 20% of land was seized by British colonial authorities and the subsistence farmers on it forced into the wage market, or the poll tax that forced even surviving subsistence farmers to participate in the money economy. I have no doubt that the money value of GDP skyrocketed, simply because of the monetization of activities that were previously carried out in the informal and household sectors.

On the other hand, if Americans met as many of their consumption needs as possible through LETS networks and other informal and barter means (including physician services on retainer with the LETS network), and produced their use value through home production with small-scale electrical machinery, a la Kropotkin/ Borsodi/Mumford whenever it was more efficient, it's quite likely the GDP would suffer a catastrophic implosion from most mainstream econmists' standpoint. They'd be howling in the op-ed pages about how Americans had stopped "contributing to the economy."

The problem with most mainstream economists is they don't draw the obvious real-world conclusions from what they "know" in principle.

Re reason's comments on the commons, Garret Hardin later expressed a wish that he'd titled his article "The Tragedy of the *Unregulated* Commons."

Why doesn,t the author of this blog show us some real-life examples of how mainstream conventional economists in the real world of political and economic interests stand up for the principles he is citing here, like taxing negative externalities. Yes, some of them, sometimes, pay lip service to these principles but even that is hardly a majority. Environmental economists, those who actually take these issues seriously and work hard to bring them into the academic mainstream (using classical economic principles), are as yet but a marginal minority with hardly any impact in the mainstream. Why is it, do you think, that somebody like Stern was so almost universally dissed by his economics colleagues for daring to suggest that the survival of future generations threatened by drought, floods and other effects of global warming, might be more important than the short term profit interests of certain industries? You may call this a "technical and ethical dispute" but that dispute is right at the heart of the issue, and for some reason, mainstream economists manage almost always to "resolve" that ethical dispute in the way that is most favorable to the corporation. Significantly, the same economists routinely deny making ethical judgements at all.